Microsoft has sent another letter to Yahoo's board of directors to give them a wake-up call. It begins:

It has now been more than two months since we made our proposal to acquire Yahoo! at a 62% premium to its closing price on January 31, 2008, the day prior to our announcement. Our goal in making such a generous offer was to create the basis for a speedy and ultimately friendly transaction. Despite this, the pace of the last two months has been anything but speedy.

In case Yahoo's board members don't get off their behinds, Microsoft says:

If we have not concluded an agreement within the next three weeks, we will be compelled to take our case directly to your shareholders, including the initiation of a proxy contest to elect an alternative slate of directors for the Yahoo! board. The substantial premium reflected in our initial proposal anticipated a friendly transaction with you. If we are forced to take an offer directly to your shareholders, that action will have an undesirable impact on the value of your company from our perspective which will be reflected in the terms of our proposal.

So, what is the chance of a substantial number of Yahoo shareholders saying to themselves: "Yahoo's board is going to turn the company around and the shares will go up much higher than Microsoft's offer. I'm going to hang on and back my board"?

On Friday, the market reaction was that Yahoo's shares fell on the prospect that Microsoft might walk away. Rather than being able to increase the share price, Yahoo's directors are probably looking at a substantial fall....

Update 1: Reuters now has a substantial story, Microsoft CEO sets deadline for Yahoo deal, which says: "It's part of a highly choreographed dance and parallels the take-it-or-leave-it bidding strategy Oracle Corp has used to win a string of deals to consolidate the software industry."

Update 2: Yahoo has replied with a prompt letter that says, more or less, either give us more money or take a hike. One part says:

Our Board's view of your proposal has not changed. We continue to believe that your proposal is not in the best interests of Yahoo! and our stockholders. Contrary to statements in your letter, stockholders representing a significant portion of our outstanding shares have indicated to us that your proposal substantially undervalues Yahoo!. Furthermore, as a result of the decrease in your own stock price, the value of your proposal today is significantly lower than it was when you made your initial proposal.

Yahoo also points out that there could be anti-trust problems; "Any transaction between us would result in a thorough regulatory review in multiple jurisdictions."